Sustainability commitment, environmental achievement, and green bond premium

Existing studies argue that, among various types of external review, only second-party opinion (SPO) significantly boosts the green bond premium (Greenium) owing to its informativeness. Yet it remains unclear what information induces investors to confer additional Greenium. To address the puzzle, we conduct a content analysis of 135 external reviews in search of novel determinants of Greenium. We find that 82 % of SPO statements provide an assessment of the issuer's greenness, which is absent in other types of external reviews. In particular, the majority of SPO statements explicitly reference the sustainability commitment or environmental achievement of the issuers. This suggests green bond investors may not merely care about the greenness of the use of proceeds. Based on this qualitative finding, we conduct an empirical analysis of the relationship between Greenium and issuers' sustainability commitment and environmental achievement using a matched sample of green and conventional bonds. Our results highlight that investors confer a larger Greenium to green bonds from issuers with stronger environmental achievement. This is in line with our theoretical model where rational green bond investors leverage an issuer's environmental track record to infer its sustainability governance, which underpins the successful implementation of the projects behind the green bond. Finally, we find that although sustainability commitment alone does not affect the Greenium, it significantly magnifies the impact of environmental achievement on the latter. As a result, issuers whose actions do not measure up to their sustainability promises may incur even a higher cost of capital in the green bond market. Overall, our results suggest that investors actively utilize additional information about the issuer to gauge the credibility of a green bond.